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China and its move to become an IP powerhouse

Over the past few years, China’s patent and copyright frameworks are starting to change. Historically, China does not have a strong reputation among other innovative nations with regard to intellectual property (IP) rights. But recently, China’s approach towards IP rights is seeing a transformation. China is projected to rank among the top three countries in the world in terms of annual patents for inventions. Most notably, China has almost doubled the amount of patent applications overseas, many of which are to be examined by the United States Patent and Trademark Offices (USPTO). The Chinese government has made substantial changes in enforcing patent laws in the last decade. Because of these improvements, and because businesses are always seeking out to get the best protection for their intellectual property, U.S. companies are now seeking protection on their patents in China through China’s State Intellectual Property Office (SIPO).

Whether there is a Chinese company doing business in the U.S. or vice-versa, the issue turns on what could these companies do to prevent infringements and avoid costly litigation. The answer, as recent evidence from the influx of claims shows, is simple: companies file for their own trademark and patent (American or Chinese) in the respective country before their competitor does.

The old notion that China is just a “copy-powerhouse” fulfilling foreign companies’ demand needs is a matter of the past. Instead, for most of the 2010’s, China has encouraged Chinese businesses to expand innovations that are more focused on acquiring more patents. In doing so, China has also changed its approach to protection for foreign companies making it more difficult for foreign companies to gain patent or copyright protections; therefore, limiting foreign investment from companies that are headquartered outside of China’s borders.

It has become clear that China’s strategy is to enforce strict patent laws for foreign companies coupled with an aggressive push to increase domestic patents. To complement this new ideology, China provides rebates though the Patent Cooperation Treaty (PCT) by which foreign applicants go through an international phase before entering China (the national phase). This shift in policy may be construed as China using its patents as economic ammunition. China will continue to expand its patents to maximize its streams of revenue. Arguably, in the IP world, China’s new policies are targeted to better protect Chinese companies.

Additionally, China has implemented incentives for innovators. Firms also have an incentive to file patents through a program introduced in 2008 which offers tax benefits, including a reduced corporate tax rate of 15 percent instead of 25 percent, to firms that qualify as High-and New-technology enterprises (HNTE). The government has also encouraged academic patent filings by putting more weight on patent applications than published papers when granting promotions and by subsidizing patent fees for universities. According to the World Intellectual Property Organization’s 2011 IPR report, university and public-research organizations filings under its Patent Cooperation Treaty have grown from nearly zero in the 1980s to more than 15,000 in 2010. Comparative patent filing statistics from China and the United States show that Chinese universities now file over four times as many patents as universities in the U.S.

As evidence from the USPTO, Patent claims from China in the U.S. are growing, especially in areas of software, telecom, and manufacturing. At this pace, China is on course to surpass Japan and the U.S. in the number of annual patents. There is the potential that China can be the world’s greatest “innovator,” and conversely U.S. would “copy” China. So not only will China own a huge chunk of the U.S.’s debt, they will also own patents that U.S. companies will have to license.

As emerging markets like China continue to grow, so do patent and trademark applications and cases. Chinese companies and individuals will become a major innovation force, as China already has the reputation of producing quality products at very low-cost compared to its competitors worldwide. In hindsight, the Chinese middle class – numbering in the hundreds of millions – is driving consumption of IP-rich products from handbags to watches, cars to smartphones. The demand for and supply of intellectual property continue to grow exponentially in China.

So what is the solution? Some would argue it is pretty simple: balance. China’s economic growth is a reflection of many factors, but to remain competitive in a complex global economy, China needs to compromise. The American companies that litigate in China do not feel like they are getting the blanket of protection they deserve, while the Chinese are multiplying patents in the States by the hour. This does not mean that the U.S. should kneel to China’s innovative market. Instead, for a fair market to grow and prosper, balance is required along with a set of laws/rules that will assist in maintaining this balance. Without addressing this issue, imbalance in policy and procedure will continue. Therefore, China will face two major challenges: 1) they risk having foreign companies continue to invest and bring over their best technologies; and 2) eventually foreign companies will retaliate; thus, business relationships can go sour and Chinese companies will be subject to expecting the same behavior in other countries.